Payroll fraud schemes can significantly hurt an organization’s bottom line.
Occupational Fraud 2024: A Report to the Nations shows that payroll schemes range in losses between $10,000 and $250,000, with average losses exceeding $380,000. That staggering amount is something that all fraud examiners, internal auditors and oversight professionals should pay close attention to. In the
2022 Report to the Nations, the median loss was $45,000, and in
2020, payroll fraud schemes cost an estimated $62,000 in median losses. In many cases, these schemes persist undetected, buried in routine payroll and overtime approvals.
Beyond the Workday
Working overtime is a global phenomenon. A 2022
European Union report noted that overtime is prevalent in many countries, each with different definitions of what constitutes overtime and whether employees are required to accept the work. Laws in the United States, regulated by the U.S. Department of Labor’s Wage and Hour Division, generally require that any amount over 40 hours must be paid as overtime at a minimum of 1.5 times their hourly pay. Some overtime can be paid as “double time,” or twice the rate of their hourly pay. This increase can be a substantial driver in fraudster’s interest in accumulating false overtime. The payouts can be massive, especially when the overtime is fabricated and requires no additional work.
Overtime Fraud Schemes
False overtime schemes fall under the “Falsified Hours and Salary” category of payroll fraud, as defined by the
Fraud Examiners Manual.
According to the 2024
Report to the Nations, payroll schemes were reported in 7% of cases in the Asia-Pacific Region and the Middle East/North African Region, 8% in the Eastern European and West/Central Asia Region, 6% in the Latin American/Caribbean and Sub-Saharan Africa Regions, and 4% in the Southern Asia Region. In North America, payroll schemes accounted for 15% of cases, compared with 12% in Western Europe.
The
Fraud Examiners Manual shows that both the overstated hours and the false rates of pay can be accomplished alone or in concert with others, which are typically supervisors. In some cases, supervisors receive kickbacks from overtime payments, particularly when they are not eligible for overtime.
“Show Me the Money... er, the Timecard!”
Recent cases have highlighted the false inflation of hours or eligibility for overtime compensation as a major issue. For example, in late 2020 in New York City,
federal prosecutors charged five current or former employees of the Metropolitan Transit Authority (MTA), which operates the city’s famed subway and the Long Island Rail Road, with overtime fraud costing taxpayers hundreds of thousands of dollars.
One longtime MTA employee racked up 3,864 overtime hours, in addition to 1,682 regular hours. Prosecutors noted that even if the defendant had worked all 365 days of the 2018 calendar year, including weekends and holidays, it would have required 10 overtime hours every day beyond a standard 40-hour work week. This person was
sentenced to eight months in federal prison.
In Massachusetts, both the Boston Police Department and the Massachusetts State Police have had similar scandals involving the use of overtime.
In December 2023,
two former State Police supervisors were convicted of a three-year scheme to defraud the state (and the federal government) through regularly arriving late to, and leaving early from, overtime shifts intended to prevent traffic fatalities and improve road safety. Those grants were funded by the federal government. One of the defendants, a high-ranking officer, also had a security business on the side where he spent much of his time. Once initially detected, the co-conspirators shredded and destroyed forms and documents, excusing the issues by falsely stating that the missing documents had been lost during office moves.
The Boston Police Department saw eleven current or former officers charged in the fall of 2020, claiming to have worked at an evidence storage warehouse. But according to the charges, the warehouse alarm system was activated (indicating the warehouse was locked and closed) when they claimed to be working. Several of the officers charged pleaded guilty, although several went to trial and were acquitted (see below).
When Is It Not Fraud?
In 2023, four of the 11 Boston Police officers charged in 2022 were charged in a
superseding indictment involving conspiracy to commit wire fraud in the scheme. However, they were later
acquitted because defense attorneys persuaded the jury that their conduct, despite exaggerating hours worked, was actually
accepted as a pattern of the agency’s policies and practices; they claimed that it was the agency’s longstanding practice that overtime worked, regardless of actual hours, were always logged in four-hour increments.
Similarly, a
judge dismissed felony counts against California Highway Patrol officers for similar conduct in 2022. By participating in a diversion program and paying back the funds, the officers were able to escape criminal liability. Like the Boston case, the officers argued they were following established practices by the agency. Defense attorneys were quick to place the blame on the organization and leadership.
Overtime fraud schemes are not limited to government or law enforcement agencies. In Alabama,
five employees were charged in an overtime fraud against their employer, one of the largest pork production operations in the state. The scheme allegedly cost nearly $100,000 in losses. Another case involves a
Virginia childcare worker who was also arrested for fraudulently claiming overtime in 2023; in her case, she claimed to be working on her personal phone, not on her employer-issued phone or laptop. The defenses she raised were not corroborated by an extensive investigation, records management, computer file audit logs, cell and landline phone data, or time sheets. In addition, she claimed to keep physical files at her house, despite the employer’s move to all-electronic record keeping more than 10 years prior.
Overtime fraud is a major concern for employers and organizations. Short staffing and quick deadlines can exacerbate the challenges of managing staff, as well as remote and hybrid positions. But the institution of strong and clear policies, procedures and auditing can lead to strong prevention, quick detection and prompt remediation, saving organizations time and money.
